How to Avoid Difficult Limited Partner Exits at Year 15

How you can protect your project in its infancy from “aggregators” and other bad faith dealers who may try to disrupt the year 15 exit for personal gain.

Jaclyn Fisher | April 2021

In recent years, there has been an insurgence of private firms who have begun systematically challenging nonprofits’ project-transfer rights and disrupting the normal exit process in hopes of selling the LIHTC property at market value. Rising values in certain markets have created an opportunity for these firms to profit far beyond the original investors’ expectations. Some investors are taking advantage of the investor interests they already hold in LIHTC projects, while others have begun acquiring LIHTC projects en masse for the sole purpose of disrupting the Year 15 exit later for profit, these actors are referred to as “aggregators.” 

Though the original intended benefit to the equity investor in a LIHTC deal, understood by all parties, is that the maximum amount of tax credit and depreciation benefits from the project flow directly to the equity investor so that they may take advantage of these benefits, bad faith investors are now capitalizing on “soft language” in partnership agreements and creating disputes in order to get more out of the deal than initially intended by the parties. Some of the tactics used include disputing the conditions and scope of transfer rights; delaying, obstructing, and disagreeing with related valuations; refusing consent to refinancing, either outright or by placing significant conditions on consent; disputing fee calculations; arguing over typographical errors; and asserting alleged breach of partnership duties from years prior, including by arguing that rents should have been set higher to maximize profit.  

More recently these actors have begun challenging the general partner’s transfer rights under the right of first refusal language contained in the partnership agreement, claiming that bonafide third party offers for the purchase of the LIHTC property must be at fair market value in order to comply with the common law requirements of rights of first refusal. This presents an obvious challenge for nonprofit general partners, as it has always been the consensus that the intent of the right of first refusal as an exit option at year 15 was created to keep the projects in the hands of non-profits and preserve the projects affordability, not to sell the projects at Fair Market Value to the highest bidder. In doing so, private investors are threatening to extract profits from the nonprofit. 

Recognizing that most nonprofits do not have the recourses to litigate these issues in court, these actors leverage a profitable cash payment or the sale of the affordable property at fair market value in return for leaving the partnership. The results are that LIHTC projects are less likely to continue operating in the hands of mission-driven nonprofit partners and these disrupted transfers invariably drain the nonprofit partners’ resources, especially if litigation is involved.  

A nonprofits best course of action to head off these types of threats to a LIHTC deal at Year 15 lies at the commitment letter or letter of intent phase of equity investment. More specifically, it is important that the commitment letter and/or letter of intent from a prospective equity investor be read and negotiated at the early stages of the deal to avoid any “loopholes” or language from entering into the deal that will otherwise end up in the partnership agreement; and that the bad faith investor can then use later to take control of the partnership and force a fair market value sale of the property.  

As we continue to monitor the litigation that centers around this issue, we are able pin point the specific ways bad faith investors are attacking LIHTC deals at Year 15 and with this knowledge are then able to help nonprofits negotiate commitment letters and/or letters of intent that can withstand or even avoid these attacks.